Climate Change Policy: Government and industry need to continue the dialogue and a principles-based approach should form the basis of action

"As Australia heads towards the election on 21 August, climate policy remains a crucial issue for Australian industry. Government and industry need to continue the dialogue on climate change and a principles-based approach should form the basis of action," Ai Group Chief Executive Heather Ridout said today.

"Ai Group’s strong climate policy principles have been further developed by a high level Leaders’ Group of companies from across Ai Group’s diverse membership. We have today released these expanded principles which have been endorsed by Ai Group’s National Executive. They are further detailed in the document below and include the following:

• The competitiveness of Australia's trade-exposed industries cannot be eroded;
• Australia should be able to meet its international emissions reduction commitments at least cost;
• Climate policy must respect existing investments to avoid acute short - medium term disruptions while supporting efficient long-term investment in the energy and other sectors;
• A central feature of policy should be supporting research and development of new approaches to emissions reduction and refinement of existing approaches; and
• Compliance costs and regulatory burdens should be kept to a minimum.

"One of the most important tasks for the next government will be to get climate policy right. Business needs to have confidence that their concerns are well understood by all sides of politics as they refine their climate change policies and we would encourage all parties to embrace these principles.

"Ai Group and its members, guided by these strong principles, will seek an active engagement and positive collaboration with the new government to address the risks posed by the accumulation of greenhouse gases in the atmosphere. We seek to work with all parties for a policy that secures Australia’s posterity while preserving its prosperity," Mrs Ridout said.

Background
In February the Australian Industry Group established a high level Leaders’ Group on Climate Policy to take a fresh look at the issues. Chaired by Ai Group National President Don Matthews, the Leaders’ Group brought together chief executives and senior managers from leading companies in sectors including manufacturing, metals, energy generation, pulp and paper and agriculture.

The Group had excellent and candid discussions with the Government and the Opposition about their respective policies, heard from experts in climate negotiations and science, and considered the issues of international action, Australian abatement and policy design in detail. All Ai Group members have been kept informed of the Group's progress and have had the opportunity to contribute.

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Ai Group’s Climate Policy Principles

Ai Group’s National Executive has endorsed the following framework as a basis for assessing proposed climate policies. Bolded text is a principle, underlined text is an elaborated sub-principle, and subsequent text is explanatory.

1. The competitiveness of Australia's trade-exposed industries cannot be eroded.

a. Global action is fundamental to preserving Australian competitiveness and should be actively promoted in international forums. The starting point for maintaining competitiveness is global action. Even strong measures aimed at trade exposed industries cannot maintain Australian competitiveness over the long term without global action; eventually, the burdens of maintaining such policies while cutting national emissions would become insupportable. Governments should use every opportunity, including though the G20 to push for global action.

b. Neither Emissions Intensive Trade Exposed industries nor the broader trade exposed sector should be unfairly disadvantaged against overseas competitors while global action remains patchy. All major economies have pledged targets or actions, but while mostly significant, these are not yet sufficient to prevent serious competitive impacts from an Australian carbon constraint. Strong measures are needed to maintain the position of Australia’s most vulnerable industries against unconstrained competitors. While different specific measures may be appropriate for the most emissions intensive industries and for the broader trade exposed sector, measures for the latter should be no less effective.

c. Policy should build Australia’s long-term competitiveness, including in energy. Even under a globally consistent carbon constraint, long-term Australian competitiveness will be damaged unless we adapt effectively to a low carbon global economy. An important part of this will be ensuring a continuation of Australia’s advantage in relatively cheap energy. Policy should support an efficient pathway to energy sources that will be globally competitive in the long term under a carbon constraint, whether that turns out to mean gas or coal with carbon capture, renewables, or even nuclear energy. Investments in infrastructure for the transmission and distribution of energy must modernise these systems to capture the benefits of decentralised generation, greater flexibility in fuel sources, and effective management of demand and supply.

2. Australia should be able to meet its international emissions reduction commitments at least cost.

a. Policy should cover the broadest practical base of emissions. The more emissions are covered by policy, the more widely abatement action and costs can be spread. While practical factors may narrow the base, this intensifies the abatement burden for covered sectors.

b. Policy should drive all credible and internationally recognised forms of abatement. Many forms of abatement are available: reductions using existing or future technology to improve carbon efficiency, sequester carbon in the landscape or change energy generation; behaviour change; and imported abatement. Minimising costs requires that all these options be open and that they compete for resources on a common basis. The economic cost to Australia of emissions reduction is only justified if it contributes to an international mitigation effort that reduces climate change. If we rely on abatement that is not recognised as meeting Australia’s commitments, we must either undertake additional abatement at further expense, or risk undermining the international framework that justifies the cost of abatement.

c. Market mechanisms will generally be most efficient in locating and driving least cost abatement. While regulation or direct government funding can have a role in some circumstances, bureaucratic or political decision making are usually poor substitutes for the judgments of market actors responding to price in light of their own circumstances.

d. Complementary measures should be adopted only where they can achieve abatement at lower cost than market mechanisms, or enable markets to work more efficiently. Markets will not work in every instance, and they can be made to work better - for instance through measures to address information gaps or agency problems. Such interventions should be chosen with care to ensure they actually minimise costs.

e. Any interim measures preceding a long-term climate policy should be consistent with longer-term policy directions, have acceptable start-up and phase-out costs and must achieve least cost abatement, including on a net present value basis, to ease the transition to longer term policy. There is a role for interim measures in the lead-up to a long-term mechanism, but these can easily turn out to be high-cost or more trouble than they are worth to bring in and phase out.

f. Distortions and perverse incentives should be minimised, especially those that discourage early movers. While climate policy is intended to correct a market failure, it can easily introduce failures and distortions of its own if not carefully designed. Abatement incentives can be positive or negative, but they must be allowed to operate, rather than being blunted, if abatement is to be least cost. Policy must also avoid creating incentives to defer or drop abatement investments that would most efficiently be made now.

3. Climate policy must respect existing investments to avoid acute short-medium term disruptions while supporting efficient long-term investment in the energy and other sectors

a. A clear, predictable and well designed long-term policy is vital for business to make efficient long-term investment. Perfect certainty is unachievable, and the quality of policy is vital, but there is no doubt that substantial uncertainty over the timing and direction of climate policy is a serious barrier to investment in energy and other major industries across the economy.

b. Policy should provide a clear and supportive environment for new energy investment. The problems of policy uncertainty are especially serious in the energy sector. Forward looking investors need reasonable confidence about the regulatory environment that will apply over the life of their investment. That environment must be a supportive one, however, if investment is actually to result.

c. Policy should smooth shocks in the energy sector, ensure that any generation exit is orderly and satisfy existing investors’ legitimate expectations. Sudden shocks from climate policy may cause intense difficulties for some generators. This would mean risks to near-term energy security, impose serious loss on existing investors, increase the cost of transition and dissuade future investment. Policy should smooth shocks and satisfy investors’ legitimate expectations. The impacts of structural adjustments in the energy sector on affected companies and communities must also be addressed.

4. A central feature of policy should be supporting research and development of new approaches to emissions reduction and refinement of existing approaches.

a. A market for low-carbon goods and services is necessary for broad-based innovation. The development of low-carbon products and technologies will be severely constrained unless innovators are confident that a low-carbon product will be more profitable than a high-carbon substitute. The existence of an actual market is a more plausible spur to innovation than the unpredictable availability of year-to-year grants or subsidies.

b. Additional support is needed to reflect spillover benefits from carbon innovation and the high costs of commercialising some new technologies. Even with a market reward, low-carbon R&D produces benefits for society at large that the researcher cannot capture. If R&D is not to face underinvestment, further assistance will be needed, whether through the tax system, grants, prizes or otherwise. Some promising technologies, including renewable energy technologies and carbon capture and storage, require significant support through demonstration and deployment phases if they are to achieve their potential.

5. Compliance costs and regulatory burdens should be kept to a minimum.

a. Policy should achieve maximal coverage with a minimum of parties directly involved or regulated. While all Australians and companies are responsible for greenhouse emissions to some degree, administrative costs and burdens would be insupportable if more than a small fraction of emitters were directly regulated or liable under carbon policy.

b. Policy should rely on existing data and reporting systems wherever possible, with any new processes imposing the minimum additional burden necessary for good governance. While policy needs information to operate, a great deal is already collected and new requirements for additional or slightly different data can easily become very costly. Processes to judge difficult concepts like ‘additionality’ are especially likely to be expensive, time consuming and inflexible.

c. Policy should drive the elimination and avoidance of unnecessary, duplicative and unduly burdensome climate regulation. A vast array of largely uncoordinated climate policy already exists and the political incentive for more is constant. Much of this would be unnecessary or avoidable under a broad long-term policy.